Governments introducing output parameters in the funding rule of universities believe that it will induce universities to raise their teaching efforts while educational standards will remain unaffected. We show that this presupposes positive interaction effects between students abilities, students efforts and universities teaching efforts within the educational production function. Empirical data on success rates of Flemish university students reveal a strong correlation between students probabilities of success and socioeconomic background. Moreover, we find a strong social clustering within universities. Hence, combining theory and empirics we conclude that output funding for Flemish universities would lead to socially undesirable effects. Universities attracting more students with a vulnerable socioeconomic background will not be rewarded for raising their teaching effort in the same way as other universities.